Retirement Planning.

Retirement planning is one of the most neglected areas in personal finance. It actually means the amount you require at the time of retirement to lead a comfortable post retirement life. The income requirement varies for all and hence the corpus amount. In this article, I highlight on its importance and the factors which needs to be considered while doing the planning.

Retirement can happen at any stage, irrespective of the age in numbers. It can happen at 55,60 or 65 years. By retirement, we mean a state, when one is able to generate an income without depending on job or anyone else to lead a life of one’s own style. So, in reality, retirement happens when you are moving from a pay cheque to self cheque. The reason why number does not matter is that there are professionals like lawyers, doctors, chartered accountants etc. and entrepreneurs, who can practice or work as long as they wish. However, they may be met with scenarios where they will be unable to continue their services because of ailments or family difficulties. This explains why retirement planning is important to all people irrespective of their field of service.

On the other side, no one can predict the life longevity. One may have a longer post retirement life than his professional life. Here the consideration should be that one should be able to save an amount that can provide an income as long as he and his dependent is alive. So, the planning should include not only the earning member but also the spouse and other members in the family who may need special care.  

Earlier, the government employees were benefitted by the Government voluntary pension schemes. But with the present contributory pension schemes, monthly pension depends on the investment done during the earning period.

It is true that just after retirement, there may be a reduction in expenses just like reduction in the income.   However, the expenses will increase over a period of time.  And so, the monthly income received will become insufficient to meet the expenses.  Hence it is essential for all to make a retirement plan and do additional investments as part of this planning. 

The retirement planning is divided into two phases.

1. Accumulation phase- This is the period one earns income from job or profession and saves for his retirement life.

2. Disbursement phase- This is period when the investor is able to generate money from his investments.

The first step is to identify the corpus amount required, based on life style expenses and inflation. Inflation is one area where the investor has no control but the previous data on inflation can be used to factorize its rate while planning. Duration also plays an important role, because, longer the duration, more the flexibility in terms of amount to be saved and the mode of saving/investment. 

While making additional investments, the consideration should be on liquidity and tax efficiency. Easy access to money is very important to meet emergencies arising out of health/medical conditions. Medical insurance will support to mitigate the risk of large spending in hospitalization cases. Absence of adequate medical insurance coverage can wipe out your large savings and push to very extreme conditions.

The following are the common options available currently for retirement planning.

1. National Pension Scheme (NPS)

2. Annuity/Retirement Plans from Insurance Companies 

3. Retirement Plans from Mutual Funds Companies

Of the above, NPS is the instrument which works on the basis of the accumulation phase and disbursement phase. It allows investment on a monthly basis or lumpsum basis. However, it is mandatory that there should be a minimum investment every year till you opt for annuity. Once opted for annuity, it provides a fixed monthly income throughout your life.

Annuity schemes from Insurance companies are mostly single premium payment schemes. These schemes do not offer any insurance coverage. Here one can invest on a lumpsum basis and defer the start of the monthly pension. The schemes allow deferment up to 10-12 years. ` 

However, to keep up with the changing trends, recently, Max Life has introduced a whole life income plan variant under Smart Wealth Plan (SWP) which can provide tax free income for joint life. But here also it is a single premium payment and comes with other conditions such as the minimum age of joining as 45 for the younger life and mandatory waiting period of 5 years for the monthly income to start. Tata AIG also has  a similar plan providing income for whole life. 

Retirement plans from Mutual Funds work well as it offers the option of monthly investment as well as lump sum investment. There is no such requirement of minimum payment on every year. It has a minimum lock in period based on the age of the investor. Most of such plans are hybrid products as it is a combination of equity and bonds.  However, it is to be noted that there is no guaranteed annuity offered by mutual funds, but one can generate monthly income using Systematic Withdrawal Plan (SWP), which is more tax efficient.

Another option available as part of retirement planning is to utilize the money back schemes offered by insurance companies. One can selectively choose a money back plan and customize it in such a way that it can provide monthly tax-free income during his/her golden age. Many schemes are there offering income for 10/20/25/30 years based on investment period of 8/10/12/15 years.

Pension from Government, Annuity plan from Insurance and pension from NPS are fully taxable as per the income slab. To optimize on the tax after retirement, investors can diversify by investing in mutual funds as well as investing in a customized insurance plan. If you are already covered by an annuity plan providing monthly pension of your requirement, instead of investing in fixed deposit, it is better to invest in debt mutual funds, which offer liquidity and tax efficiency. 

Ideally, Retirement planning should start on the day, one start earning irrespective of age. One should start making his retirement plan at least 15-20 years before his actual retirement. So considering the general retirement age of 60 years, the planning should start at least in early 40s. The earlier you start, lower the monthly allocation needed and if you delay it, allocation amount will have to be increased. Hence it is ideal to start early and   take a proper guidance to have a comfortable post retirement life.

For more details on Retirement Planning, contact George Jacob on 8547442952